VIX Futures Contango Bubble
by Chart School - July 10th, 2010 3:30 am
VIX Futures Contango Bubble
Courtesy of Bill Luby at VIX and More
Truth be told, there is no such thing as a “contango bubble,” but I like how the two words look juxtaposed and it is Friday…
Bubble or not, the VIX futures are stretched to an extreme that I do not ever recall seeing and to the extent that the grapevine is whispering to Adam Warner of the Daily Options Report that the differential between the first month and third month VIX futures is at its highest level ever. (Note to self, why doesn’t the grapevine ever whisper to me?)
The chart below, courtesy of FutureSource.com, shows the difference between the VIX third month futures and front month futures (VX V0 – VX N0 in current VIX futures parlance) going back about six months. Personally, I tend to get excited when the third month VIX futures rises more than 2.00 higher than the front month, as this frequently suggests that the VXX negative roll yield contango play is starting to set up.
Some 17 months after its launch, I probably still get more questions about VXX than any other subject. As much confusion as there is about VXX, I think it is probably time to come out with an extended look at this volatility product in the next week or two.
For more on related subjects, readers are encouraged to check out:
- VIX Spike and VIX Futures Contango Means…
- VXX Calculations, VIX Futures and Time Decay
- VIX Term Structure and VIX Forecasts
- VIX:VXV Sell/Short Signal
- Is the Fear Bubble Bursting?
- VIX Futures Starter Kit
Disclosure(s): short VXX at time of writing
Comment by Ben: I don’t understand what this means. Is it a signal to short VXX? Buy it? Or VXZ? Or what?
Bill’s response: It is not a signal to short VXX, though that is the position I currently have on right now. What it means is that the consensus is that the VIX has fallen too far, too fast. The VIX futures indicate that the market believes the VIX will spike back up into the 30s over the course of the next few months.…
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DiggThe Death Cross: Another Sign That We Are On The Verge Of A Recession?
by ilene - July 5th, 2010 9:16 pm
The Death Cross: Another Sign That We Are On The Verge Of A Recession?
Courtesy of The Economic Collapse Blog
The Standard & Poor’s 500 50-day moving average stands poised to cross beneath the 200-day moving average. To those in the financial industry, this is known as a "death cross", and it is a very powerful indicator that we could be entering a bearish period. So is this yet another sign that we are on the verge of a recession? Well, anyone who has spent much time trying to interpret financial charts will tell you how inexact that science can be. Financial markets can be wildly unpredictable, and there is always a tremendous amount of manipulation going on behind the scenes. However, when you add this impending death cross with all of the other signs that we could be entering a recession, there certainly seems to be reason for alarm. The truth is that financial markets across the globe are full of fear and panic right now. In fact, as noted in another article, the dominant force in world financial markets in 2010 is fear. When fear rules, markets become very volatile and they can fall very quickly. Anyone who has spent much time trying to squeeze profits out of world financial markets knows that they tend to fall much faster than they ever rise. So are we now approaching one of those times of panic when financial markets across the world fall at breathtaking speed?
Well, the truth is that nobody knows. Anyone who says that they can predict these things with 100 percent certainty is either a liar or they are unbelievably rich.
But certainly the mood in the financial markets is grim. If a death cross does happen on the S&P it is going to make things even more tense.
For those not familiar with investing terminology, Investopedia defines a "death cross" this way….
A crossover resulting from a security’s long-term moving average breaking above its short-term moving average or support level.
In this case, the death cross would be happening on the S&P 500, which is a weighted index of the prices of 500 large-cap common stocks actively traded in the United States. The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market.
So how soon could we see a death cross on the S&P 500?
Well, some analysts believe that it could happen almost…
Market Miyagi Says Risk On, Risk Off
by ilene - June 16th, 2010 5:06 pm
Market Miyagi Says Risk On, Risk Off
Courtesy of Joshua M Brown, The Reformed Broker
I don’t care if you trade forex, stocks, commodities or bonds – if you’re out here running money in any capacity then you’re braving the Risk On, Risk Off training regimen that the Market Miyagi is putting us through. It changes daily or bi-daily, but damn if I don’t feel like a pinball on my last ricochet before I head home each night.
Early in the morning, Risk On is signaled by positive economic data points out of China. The next thing you know, the euro’s being short-squeezed putting pressure on the dollar while US Steel ($X), Freeport Mac ($FCX) and the rest of the industrial-cyclicals are dancing around the maypole with streamers and confetti.
The very next day it becomes Risk Off as the TV studios in Englewood Cliffs welcome the Performing Bears fresh from the Moscow Circus. Futures are the blood-red opposite of the prior day’s close as the Dollar, the Vix, Gold and Treasuries puff up their chests.
- Monday the bulls blast a hole in the sky
- Tuesday the bears say ‘The End is Nigh’
- Wednesday risk assets are all the rage
- Thursday fear is back on the front page
- Etc.
I’ve caught a few of these turns in both directions but there are simply too many to risk catching them all. Like most patterns, once the crowd catches on and learns to play, it gets even more difficult. We may not be there yet, but soon.
"Risk On, Risk Off. Buy Danielson, Sell Danielson."
And the Market Miyagi stands off in the distance with his arms folded across his chest, grunting his approval at our attempts to run the gauntlet.
Sector Detector: InfoTech Holds Lock on Top Ranking
by ilene - June 15th, 2010 9:29 pm
Sector Detector: InfoTech Holds Lock on Top Ranking
By Scott Martindale, Senior Managing Director, Sabrient
The stock market is searching for direction, testing support and resistance levels each week. After threatening a waterfall decline last week, it instead found support and has rallied strongly. Today, the S&P 500 and Dow Jones Industrials joined the Nasdaq 100 and Russell 2000 by rising above the important 200-day moving average. However, they all remain below their 50-day moving averages.
I like to define trends in simple terms. So, when a stock or index is above both its 50-day and 200-day moving averages, I consider it to be in a bullish trend. Likewise, when below both its 50 and 200-day, I consider it to be in a bearish trend. When it is between the two, the market is searching for direction. Recapturing the 200-day was important for fighting off what appeared to be the start of a new bear trend. It shows that there is some buyer support for this market.
Market volatility represented by the VIX has settled back to around 25, which is right at its 50-day moving average and still well above its 200-day moving average. Keep in mind that the VIX tends to move opposite the market, so finding support is typically bearish for the market. We should know soon how this is going to play out.
The SectorCast-ETF model employs a fundamentals-based multi-factor approach including forward valuation, earnings growth prospects, recent analyst consensus sentiment, and various return ratios. Like the technical picture, current quant rankings reflect an uncertain outlook.
Latest rankings: Information Technology (IYW) continues its lock on the top ranking with a score of 71, but this Financials (XLF) has taken back the second spot after falling into a tie last week with Healthcare (XLV). Overall, sector scores are quite similar to last week despite the big market rally from the edge of the abyss.
Notably, Consumer Discretionary (XLY) and Materials (XLB) have both weakened somewhat this week. Also worth mentioning is that Energy (XLE) and Materials (XLB) were the only sectors to get hit with more analysts reducing earnings estimates rather than increasing.
IYW fares the best in the percentage of analysts increasing earnings estimates, and it ranks high in return on…
Retail Investors Abandon Stock Market and ETFs in Droves
by ilene - June 15th, 2010 2:55 pm
Retail Investors Abandon Stock Market and ETFs in Droves
Courtesy of John Nyaradi’s Wall Street Sector Selector
MarketWatch.com reports today that retail investors “appear to be scaling back their trading activity in June.”
Trading is down approximately -30% in so far in June compared to May, according to a report from Sandler Oneil who says, ”We suspect the May 6 ‘flash crash’ as well as the market performance since then … have shaken the retail investor’s confidence” and that “June trading levels could be at multi-year low levels.”
Not good news probably for ETrade (ETFCD) or Schawb (SCHW).
This report comes on top of recent news that Morgan Stanley (MS) is closing 300 offices and laying off 1200 employees, along with lighter than normal volume in major equities markets and fund outflows of over $1 Billion for the week ending June 2nd as reported by the Investment Company Institute.
It’s a “deer in the headlights” kind of environment wherein retail investors are abandoning the domestic equity market and that could make it a perfect time to “buy” since the “dumb money” almost always gets it wrong.
However, my opinion is that you can’t just buy anything and hold on, “buy and hold” or “buy and hope.”
I’ve said recently that current conditions offer enormous opportunity and that many millionaires will be created over the next few years. But they won’t be buy and hold investors. I’m afraid those days are gone, maybe forever, replaced by this new volatility and challenging markets that will very likely require a disciplined trading plan for success.
John
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See also: Meltup "Abysmal Volume" Summer Approaches, Even As Americans Now Openly Shun Stocks, Zero Hedge
John Nyaradi publishes Wall Street Sector Selector, an online newsletter specializing in sector rotation trading using ETFs. John is offering PSW readers a 30 Day Free Membership and Free Special Report, "Slay the Dragon Within: How to Make Your Emotions Work for You Instead of Against You." His service provides signals for going long and short using standard and leveraged ETFs. Free Membership Subscribers also get access to the Wall Street Sector Selector Monthly Webinar and a second Report, "How To Avoid the Buy and Hold Trap." - Ilene
VIX Alive!
by Chart School - June 3rd, 2010 2:21 pm
VIX Alive!
Courtesy of Adam Warner, at Daily Options Report
If I could summarize my opinion of how to use the VIX (and volatility in general) in one sentence, it would be as follows. Pay attention when it tells you something unexpected.
The VIX itself yesterday did not act all that odd. It was on the weak side given that the market itself was not that cosmically strong. But between Tuesday’s VIX strength, and the somewhat self-fulfilling prophecy of the skew curve, it’s not shocking.
No, the real message lies in VIX futures, and in turn VXX. Both maintained stubborn strength yesterday as standard measures of volatility declined sharply. The VIX is now near parity with July futures, which in a vacuum is not odd. But think about what that means; the market expects to see VIX levels in the low 30′s out to mid July. That is somewhat noteworthy as we have to remember that a VIX over 30 is pretty elevated. And July is not exactly known for high volatility.
It goes further. September VIX futures are near parity to cash VIX as well. And in fact October is modestly higher….and November modestly higher than October.
We don’t know the path the options market will take between now and then, but we do know the market right here right now anticipates it will see volatility right about here. That will seem cheap if indeed we reprise 2008 this Fall, but far more likely that’s too much Fear imho.
The Shanghai market isn’t really predicting anything
by ilene - June 2nd, 2010 2:00 am
The Shanghai market isn’t really predicting anything
Courtesy of Michael Pettis
It has not been a good year for the Shanghai stock market. Since its closing peak at 6092 in October 2007, the closing high in the past year or so on Shanghai’s SSE composite was 3471, on August 4 last year. Since then the market has been pretty bleak. The SSE Composite finished 2009 by dropping nearly 6% from that high, to close at 3277.
This year things got only worse. By May 20 the market had dropped a further 22% to close at 2556, and then bounced around for the past ten days closing yesterday at 2568. In my May 12 blog entry, I finished the piece by saying “Last Friday the SSE Composite closed at 2688. I bet it is much higher by the end of the summer.”
Obviously my timing was off. Within a week of my prediction the market had managed to lose another 132 points. I still believe that the market will be higher by the end of this summer, and that within weeks we will see moves by the regulators to prop it up. With all the liquidity sloshing around, all we need is a reasonable period off stability before the market comes roaring back, I suspect.
So am I predicting a strong economy? Not really. It is tempting to read falling stock prices as an indication that Chinese investors believe that the economy is poised to slow dramatically, and if the market surges, that Chinese growth is back, but we should be very cautious about how we interpret the meaning of the gyrations in Chinese stocks.
We’re used to thinking about stock markets as expected-cash-flow discounting machines, and we assume that stock price levels generally represent the market’s best estimate of future growth prospects, but this is not always the case, and it is certainly not the case in China. I am often asked to comment on big price moves on the Chinese stock markets and what they mean about growth expectations, but I usually try to caution people from reading too much meaning into the market.
Three investment strategies
To see why, it is probably useful to understand how investors make trading decisions. This blog entry is going to be a pretty abstract piece on how I think about the underlying dynamics of a well-functioning capital market, and how these…
ARE SMALL INVESTORS TURNING AGAINST STOCKS?
by ilene - June 2nd, 2010 1:43 am
ARE SMALL INVESTORS TURNING AGAINST STOCKS?
Courtesy of The Pragmatic Capitalist
Are small
“Individual investors held 50.9% of their portfolios in stocks and stock funds according to the May 2010 AAII Asset Allocation Survey. This is a 9.5 percentage-point drop from April and the smallest allocation to equities since May 2009. The historical average is 60%.
Bond and bond funds accounted for 25.5% of individual investor portfolios. This is the highest allocation to fixed income since the survey started in November 1990. The percentage of portfolio dollars held in bonds and bond funds rose 5.1 percentage points from April. The historical average is 15%.
Individual investors kept 23.6% of their portfolio dollars in cash, a 4.4 percentage point increase. The historical average is 25%.”
According to Charles Rotblut at AAII investors are focusing more on the return OF their capital than the return ONtheir capital:
“Individual investors placed a greater emphasis on return of capital last month because of the volatility in the stock markets. The movement of portfolio dollars out of equities and into bonds/bond funds and cash corresponds with the latest AAII Sentiment Survey, which showed bearish sentiment at 50.9%, the highest level of pessimism recorded since November 5, 2009. (Bearish sentiment is the expectation that stock prices will fall over the next six months.)”
Are small investors beginning to shun the equity markets? I think that’s highly doubtful as greed tends to be as American as apple pie, but this is a clear sign that investors are becoming less and less likely to leave their money in the
If the volatility in the business cycle has increased and increased (failing) government intervention is making the markets more recession prone then we could be on the verge of a renewed de-risking on Main Street. …
Volatility and Wide-Range Days with Neutral Closes
by Chart School - May 18th, 2010 4:19 pm
Volatility and Wide-Range Days with Neutral Closes
Courtesy of Bill Luby at Vix and More
A reader notes:
The VIX tends to move inversely with the market on a day-to-day basis. Market up = VIX down and market down = VIX up. That’s all fine and dandy MOST of the time (I’m stating the obvious here) because of expectations about the asymmetry of volatility during bull versus bear moves. But how do we square moves like Monday (05/17) when, even though the close-to-close change in the market was very small, the intraday move was very large (with implications re: continued high volatility), yet the VIX still fell? Does the VIX (from a statistical correlation perspective) only care about close-to-close changes? Isn’t that a bit shallow?
This is an excellent comment and set of questions.
In terms of background, consider that measures of volatility based on actual changes in the price of the underlying break out into two camps:
- those that focus on close-to-close price changes and ignore/understate intraday price movements (e.g., historical volatility)
- those that include intraday price variations in their calculations (e.g., average true range)
Here is where an example might help to clarify things. Take the recent ‘flash crash’ of May 6th. Even though the close-to-close change in the S&P 500 index (SPX) was a very large 3.24%, the intraday range was a whopping 8.73%. So which was the better measure of volatility on that day? My guess is that anyone who was watching the markets as they crashed would vote for the 8.73% move, as things certainly felt more like the panic of October 2008 than the relative calm of October 2007.
Given that implied volatility values such as the VIX are calculated directly from options prices, in theory the VIX does not strictly account for intraday prices. Also, technically the VIX is the market’s forward estimate of close-to-close volatility in the SPX. So from a pure statistical perspective, the VIX does indeed have a narrow close-to-close time horizon and is blind to intraday fluctuations in prices.
In practice, however, a wide range day with a relatively benign close-to-close number will typically reinforce the idea that the market is ripe for large volatility moves, even if these moves may cancel each other out on intraday basis. In my opinion, mapping these changes in price to changes in volatility is…
VIX Tops are Notoriously Difficult to Call
by Chart School - May 5th, 2010 10:21 am
VIX Tops are Notoriously Difficult to Call
Double post, courtesy of Bill Luby at VIX and More
…but I think 27.23 has a good chance of holding as a top.
Of course, events in Europe will ultimately determine where the VIX goes from here, but this does look like a good time to get short volatility.
Chart of the Week: VXX vs. VIX
Given that I have been banging the drum about VXX (iPath S&P 500 VIX Short-Term Futures ETN) since the day it was launched, now that volatility is showing some signs of coming back to life and VXX regularly trades 10-20 million shares per day, I thought it would be appropriate to provide a comparison of the performance of VXX and VIX.
For anyone who has been following this space, the substance of this week’s chart of the week should come as no surprise. Sure, volatility has been falling with almost unprecedented regularity over the course of the last 14 months, but VXX has been falling at a much faster rate than the VIX. In the last year, VXX has fallen at about twice the rate of the VIX, with the difference between the two accelerating over the course of the last 6-9 months.
As has been noted on a number of instances here, the main culprits responsible for the underperformance of VXX are the term structure of VIX futures, contango and negative roll yield.
For those who wish to get a quick overview of some of the issues behind VXX calculations and performance, Why the VXX is Not a Good Short-Term or Long-Term Play is a good place to start, with VXX Calculations, VIX Futures and Time Decay offering a more detailed explanation of what is driving the gap in performance between VXX and the VIX. An even more thorough discussion of VXX can be found in The VIX ETNs: VXX and VXZ, in the March 2010 issue of Expiring Monthly.
For more on related subjects, readers are encouraged to check out:
- Chart of the Week: VXX Celebrates One Year of Futility
- Why the VXX Is Not a Good Short-Term or Long-Term Play
- VXX Calculations, VIX Futures and Time Decay
- Disappointment Lurks as Volume Surges in VXX
- Lost in Translation: VXX and VXZ
Disclosure(s): short VXX at time of writing; I am one of the founders and owners of Expiring Monthly
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For an alternative view, see the previous post: VXX – Buy signal update.
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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